The SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA), the Dow tracking ETF, ended 2014 with a gain of 9.7% as 23 of its 30 components traded higher on the year.
The Dow’s oft-criticized methodology that gives the index’s largest weights to its highest-priced stocks proved problematic last year. Although a 9.7% gain sounds solid, it is less impressive when considering 16 of the 30 Dow stocks gained at least 10%.
The good news is that this the time of year when value investors can revisit the Dogs of the Dow theory, which highlights the advantages of building a portfolio of the 10 Dow stocks with the highest dividend yields at the end of the previous year.
“In 9 of the last 14 years, the “Dogs” have beaten the Dow by an average of about 1 percent. In 2014, the index is heading toward year-end with an 11 percent total return, while the Dogs are up 12 percent,” reports Giovanny Moreano for CNBC, citing Bespoke Investment Group data.
In descending order of end of 2014 dividend yield, the new Dogs of the Dow are as follows: AT&T (NYSE: T), Verizon (NYSE: VZ), Chevron (NYSE: CVX), McDonald’s (NYSE: MCD), General Electric (NYSE: GE), Pfizer (NYSE: PFE), Merck (NYSE: MRK), Caterpillar (NYSE: CAT), Exxon Mobil (NYSE: XOM) and Coca-Cola (NYSE: KO). [More Monthly Dividend ETFs]
“The basic strategy suggests putting an equal amount of money into each of the 10 stocks, although there have been variations that include proportionate investments in the Dogs weighted by share price,” according to CNBC.
Several well-known ETFs can help investors execute Dogs of the Dow-esque strategies, including the ALPS Sector Dividend Dogs ETF (NYSEArca: SDOG).
SDOG tries to reflect the performance of the S-Network Sector Dividend Dogs Index, which applies the “Dogs of the Dow Theory” on a sector-by-sector basis using the S&P 500 with a focus on high dividend exposure.
The ETF, which recently topped $1 billion in assets under management, equal weights its components and heads into 2015 as home to five Dow dogs – AT&T, Verizon, GE, Pfizer and Merck. SDOG gained nearly 14% last year. [Dividend Dogs ETF Hits $1B in Assets]
SDOG’s underlying has a dividend yield of 4.04% and a beta of just 0.86, indicating the combined 30.5% to three defensive sectors – telecom, staples and utilities – helps reduce the fund’s volatility. SDOG charges 0.4% per year and can be traded commission-free on the Schwab ETF OneSource platform. [Popular Commission-Free ETFs]